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June 4, 2012

Facebook’s Fiasco & Tech Outperformance

There are several fundamental factors that differentiate the social networker and its troubles from the general high-tech field

Facebook founder Mark Zuckerberg. (Photo: AP)

The most overhyped initial public offering (IPO) in the history of mankind is officially in a bear market.

Facebook shares (FB) have already sunk close to 30% to under $28 per share from their $45 peak. It’s hardly the trading start most folks, including company insiders and underwriters, envisioned.

Yet, despite Facebook’s poor debut, the Select Sector Technology SPDR ETF (XLK) had risen over 15% in April and continues to be up more than 5% for past six months (vs. about 2.5% for the S&P 500). It’s one of the S&P 500’s top-performing industry sectors. Top holdings within XLK include Apple, Cisco Systems, and Microsoft.

The Nasdaq Composite was up about 9% on May 31. Other technology indicators like the Nasdaq-100 have been ahead by more than 11.5% in the past few weeks.

Facebook ‘Fun’

How weak was the social networking giant’s IPO debut? It was so bad, that lead underwriter Morgan Stanley (MS) was forced to buy up FB shares to prevent them from dipping below its $38 offer price. The Wall Street Journal described Morgan Stanley (MS) as Facebook’s “stabilization agent.”

The tech sector has been boosted by a combination of product innovation and positive fundamentals in recent months, though.

U.S. based technology companies are sitting on a boatload of cash. Apple has around $100 billion, Google has $47 billion in its coffers and Microsoft has roughly $58 billion. Some of the capital is already translating into higher dividends for shareholders.

Retail investors weren’t the only ones who got burned betting on Facebook.

Several Wall Street’s analysts issued buy ratings even before the company went public. Wedbush Morgan and Stern Agee had buy ratings on Facebook at $44 and $46 per share, respectively.

The fact that FB shares are trading lower suggests that underwriters mis-priced the shares, leaving gullible investors and traders with a sack of coal. In contrast, for Facebook insiders, venture firms, and fee-collecting underwriters, the IPO was a bonanza.

Facebook’s earnings in the 12-months through March 31 were $972 million on sales of more than $4 billion. That gives the company a gluttonous valuation of 107 times trailing 12-month earnings.